American banks have a bad reputation. According to the 9th annual US Banking RepTrak study from American Banker and Reputation Institute released this summer, the banking industry’s reputation scores are so low that it places the industry next to last compared to 15 other industries including transport, automotive, health care and airlines. Only telecom scored worse than banking in reputation.
The industry seems to pile it on when it comes to breaching the public’s trust, from the pivotal role played by the largest banks to bring about the financial crisis of 2007-2008 through their lending practices, to Wells Fargo’s string of management scandals, most prominently the discovery of fraudulent account opening practices in the bank’s widely admired retail branch network. In fact, of the 40 banks evaluated in the American Banker/Reputation Institute study, Wells Fargo found itself at the bottom of the rankings with the lowest reputation scores.
The persistent problems at Wells Fargo raise a challenge for bank executives. It also makes clear that sacrificing standards for performance actually penalizes both. Wells Fargo earned a pittance from the falsely generated accounts, yet the reputational damage and the knock on effects have been immense.
In competitive markets, can financial institutions still deliver high performance without compromising the ethical standards necessary to keep the brand promise and maintain the trust of customers and regulators?
High performance and high standards can and indeed must co-exist. In fact, a truly effective performance management system will deliver both across the broad range of businesses in which today’s complex financial institutions participate. This is true for a mass-market consumer business like the Wells retail network or an upscale wealth management business or an institutional business like sales and trading.
By performance management system, we mean the set of hard and soft processes and practices that an organization uses to set goals, pursue them, and reward managers for achievement. In our experience, an effective performance management system requires a consistent approach across all of these components. Wells Fargo made headlines largely because the reward system seemed so forbidding that branch staff could not avoid being fired without resorting to cheating. That was dramatic, but the truth is performance management is a multi-step cycle and all the parts need to work together.
In our work with high performing businesses, we focus on shaping the cycle across seven major components:
Clarity on both the processes and results the organization is being asked to deliver
Fairly determined performance expectations
Goal setting processes that balance top down and bottom up considerations
Talent sourcing and development that provides people capable of meeting expectations
Reward and incentive structure aligned with goals and informed by behavioral economics
Performance monitoring and tracking systems
Feedback loops for adjustment and improvement
The process begins with clarity on what an organization must deliver in order to be successful. This flows from the type of business being pursued and the strategy being followed, which sounds painfully obvious, but often remains only partially articulated, especially at levels removed from senior management. The balance in emphasis between process and results is critical. For front line staff at Wells Fargo, the message tilted so far toward cross-selling that delivering a great customer experience was crowded out. Yet no senior executive at Wells would have wanted meet to cross-selling goals by degrading customer relationships.
Accountability for process and results must be translated into specific targets through a fair method to determine performance expectations for the organization. Ideally this means benchmarks for what constitutes acceptable and strong performance and differentiation between circumstances and outcomes. For example, a large retail branch network, with thousands of branches, or a wealth management organization, with thousands of advisors, will provide enough data to establish what average and above average performance looks like and to adjust for exogenous factors like local economic conditions or structural issues such as the age of a branch network. Smaller organizations can do this by tapping into external performance data from others in their industry or similar sectors.
Goal setting processes that balance top down and bottom up considerations enable overall performance expectations to be distributed across the organization. The press jumped all over the Wells Fargo goal of eight “solutions” per customer because the former CEO liked the slogan “eight is great” and Wells apparently took that goal to a single-minded extreme across its entire branch network.
However, customizing goals for everyone in a large organization is enormously time consuming and can devolve into a contentious process that diverts and saps energy rather than motivating goal achievement. An effective goal setting process differentiates between non-negotiable targets and those that can flex, limits adjustments to a few factors that really matter, and provides enough discretion for managers to exercise judgment without compromising their commitment to deliver against fair organization-wide expectations.
A talent sourcing and development model that provides people who can meet and exceed expectations also sounds obvious, but this alignment can be hard to achieve in practice. In the Wells Fargo example, the current Wells branch network was the product of merging two different cultures and teams recruited and developed under entirely different models, one from results-driven Wells Fargo, and another from process-driven Wachovia.
How many organizations struggle to scale up specialized businesses in their portfolio because their people have been recruited and trained for deep product knowledge or technical expertise rather than business performance or growth? The message here is that new performance expectations and goals will often call for change in talent acquisition and development and that means human resources will play a vital role in performance achievement.
Capable teams are motivated through a reward and incentive structure aligned with goals. Management often invests a great deal in making sure compensation levels are competitive with market conditions, but not as much in structuring compensation to motivate the behaviors that drive sustainable high performance. For example, the Wells system amply rewarded top performers, but was so tough on anyone else that pressure to “make the numbers” any way possible was virtually unavoidable. A critical lesson from behavioral economics is that “rational” financial incentives are often over-rated as drivers of performance improvement and “emotional” non-financial rewards are under-rated.
The best incentive structures avoid negative feedback effects, a offer balanced rewards for strong performers, and support long term value creation as well as immediate revenue achievement. The last condition is particularly important in service businesses where successful customer relationships are measured in years and even the best ones experience some level of revenue fluctuation.
Performance monitoring and tracking systems are the radar guidance for high performance, ideally providing both current and forward-looking measures that tell management how performance compares to targets and is likely to look in the future. Quality indicators are an important component of any performance monitoring system and serve to call attention to situations where reported performance may not be fully reflective of the health of the business. In the case of Wells Fargo, internal MIS could have flagged excessive account churn in parts of the network that were reporting acceptable performance on a nominal basis.
A feedback loop for adjustment and improvement is necessary to sustain high performance over the long term, particularly in dynamic businesses where conditions change rapidly. When business performance does not meet expectations, high performance organizations zero in quickly on potential causes and solutions. They isolate and contain areas of weakness and they identify and share best practices from their top performers. They are not afraid to change out people when needed, but they understand that continued turnover is an indicator they need to make adjustments elsewhere. In short, they are learning machines.
Most organizations that sustain high performance over a long period do so through deliberate design, optimization and alignment across all of the components of the performance management cycle. They take advantage of new research in disciplines like behavioral economics and its application to reward design. It is the rare business indeed where market and competitive conditions are benign enough to favor continued high performance without serious intentionality.
One fortuitous outcome of the Wells Fargo experience is senior management and boards of directors are re-examining what it takes to deliver sustainable high performance without compromising business and ethical standards. That should remind everyone that none of this works unless organizational leaders are committed to it and willing to make positive values one of the “non-negotiable” components of performance management. The good news is those values can be the launching pad for high performance.
Leo D’Acierno is a partner at Simon-Kucher & Partners, a global consulting firm specializing in strategy, marketing and pricing.
- How to Become an SBA Lender for the CARES Act’s Paycheck Protection Program
- Netflix-Inspired Banking: Why Corporate Banks Must Take Insights to the Next Level
- US Bank Philanthropy Raises $586M to Fight Pandemic
- How the Pandemic is Changing Payment Habits
- Don’t Delay CECL Accounting Standards, Argues Rating Agency